Arabia, Duchess Saudia T.

5BSA
Case Study: Developing Corporate Highfly Logistics Software- But how?
1. Statement of the Problem:
How will the board of directors enhance the corporate governance at Highfly Logistics Software
to serve the interest of the shareholders and the public?
2. Statement of Facts:
On June 6, 2005, a board meeting was held at Highflys boardroom in which the argument
between Tom and Arno took place
Tom was the co-founder, chairman, CEO and master brain of Highfly Logistics Software
Highfly Logistics Software is a London-based software company specializing in logistics solutions
since its inception seven years ago
The company had grown rapidly in its market niche, doubling headcount and revenue year by
year
The fast growth seemed to be slowing down the organization as some of the board members
had pointed out during the discussion around the previous agenda item
The revenues and profit margins continued to fall over the last six months
The companys costs were outpacing revenue growth as determined by Tom
In Toms letter from the CEO, he proposed the hiring freeze, closing of the cafeteria, outsourcing
of HR, Accounting and general services function to external providers, the demand that
subsidiaries rely on internal solutions exclusively and participate in more knowledge sharing
and the establishment of reducing administration costs by 5% and R&D costs by 10%
Arno was one of the most active members of the board of directors and came with a proposal
to reexamine the actual contribution of the board of Highfly
Tom felt he had a clear vision of where the company needed to be 10 years down the road, so
he tried avoiding having long and tedious board meetings
The board usually met four to five times a year for no more than two or three hours
Tom wished he didnt decide to open the company to outside investors and just kept it within
his family and group of friends so that he wouldnt be dealing with the problems he is facing
now
Arnos proposal suggested to double the number of board meetings, increase the involvement
of the board in the strategy process, build a risk management system and introduce an audit
committee which will be responsible for the risk management system
3. Guide Questions:
1. The added value of a more developed Corporate Governance system in High Fly is the
organizational adaptation which refers to modifications and alterations in the organization in
order to adjust to changes in the external environment. For the past seven years, the company
has been focusing on the satisfaction of customers and disregarding the internal restructuring
of the company. The company was blinded by its rapid growth of revenue which led the few
changes of corporate governance become unnoticed and resulted to a decrease of revenues
and profit margins for the last six months. This indicates the need for the company to adapt to
change in which includes more involvement of board of directors in the strategy process.
2. The Board of Directors at High Fly did not exercise all the OECDs principle: The
Responsibilities of the Board. The board exercised one responsibility which is taking into
account the interest of stakeholders. This is proven in the trained sales force who did not just
install and upgrade the software but also helped the customers in their own issues so as to
give them the best customer service. The board overlooked some of its board responsibilities.
 It was Tom, the CEO, and his team who make the strategic decisions for the company. Other
board members are considered as passive investors who do not participate in the day-to-day
decisions of running the company. As a board of director, they should all be responsible in
making sure that the management does not misuse the capital by investing in bad projects
and does not make decisions without considering the effects of that decision.
Areas that need improvements are: the organizational structure. As shown in figure 1.5,
the structure did not even include the board of directors and other stakeholders and the R&D
is in the same level of the management. The company should renew their organizational
structure to show the reporting relationships that govern the workflow of the company; The
company should improve in the participation and cooperation of all board members in
decisions concerning fundamental corporate changes and strategic decisions; Internal control
should also be improved by the company; The company should improve in monitoring and
managing potential conflicts of interest of management, board members and shareholders.
Without a formal organizational structure, employees may find it difficult who they officially
report to in different situations and it may be unclear who exactly has the final responsibility
for what. If the board of directors participate in making strategic decisions then the decision
made ensures that the shareholders interest is served. In a system with checks and balances,
the authority to make a decision and the associated responsibility to verify proper execution,
is distributed. This is also to make sure that no one will get too powerful over the other
because this system is a separation of power to protect the employees rights. If there is no
conflict of interest then the members will be objective in decision making.
3. If I were a board member, I would agree to Arnos proposal. I will convince Tom that my
recommendations are the best alternatives for the company by discussing to him the possible
effects of his decisions. I will tell him that his decisions will only benefit the company in the
short run and that he should look in the bigger picture for the companys long-term stability.
I can also convince him by asking the other members with the same opinion to state reasons
why Toms suggestion will not work.
4. The HighFly company did not fully exercise the board responsibilities since only Tom and
his team took care of strategic decision making. The board responsibility exercised by the
company was it took into account the interest of stakeholders by employing a highly qualified
and technically trained sales force which not only installed and upgraded the software but
also helped customers with their own issues for customer satisfaction.
The company did not act in a fully informed basis with due diligence and care because
Tom was making decisions by reacting quickly without considering the possible effects. Just
like what he included in his letter from the CEO, he wanted to cut the cost of R&D by 10%
when research and development plays an important role in the innovation process. Acting in
the best interest of the company should not permit the management to resist change.
The R&D involves researching the companys market and customer needs and develop
new and improved products and services to fit these needs. He also included in his letter to
close the cafeteria when in fact the cafeteria is a simple solution that can make workers be
more productive and to discourage long lunches away from the office. Toms decisions focus
only in the day-to-day operations and not viewing the longer-term commitments. Cutting the
costs of R&D will be a short-term solution. Tom should decide for the companys long-term
stability since R&D helps the company to become competitive. The board decision affects
different shareholder groups differently and the board has not come up to a decision that
would treat all shareholders fairly. The board did not take into account the interests of
stakeholders which is the proposal of Arno, when he gives feedback on the proposal of Tom
which is against his suggestion, Tom got angry. The key function of monitoring the
 effectiveness of the companys governance practices and making changes as needed- changes
arent encouraged by the CEO so he suggested to cut costs instead of changing the system.
The board of directors did not monitor and manage potential conflicts of interest like for
example, the relationship between Jose and Tom, they are old buddies and in the
organizational structure they are of the same level and Van and Tom who worked together
for 7 years have the same opinion on how to boost companys revenue and profit margin. The
company does not ensure its integrity of the corporations accounting and financial reporting
systems because it does not have an audit committee that would review and report to the
board about the most critical accounting policies. This also applies to the independent
director helping the company comply with the code. It was discussed that Kevin, who liked
the intelligence hidden in the companys software, is keen in promoting startups and
entrepreneurship in general. Having a good relationship between Tom and Kevin may also
indicate that they have a pecuniary relationship. The board of directors did not oversee the
process of disclosure and communications because the board only met four to five times a
year in two to three hours. Meetings were avoided by Tom because he felt that he already
had a clear vision of where the company needed to be in 10 years. The board is not able to
exercise objective independent judgment since the position of the CEO and Chairman is given
to only one person.
Five concrete ways to address these overlooked responsibilities are: (1) Board members
should be effectively briefed in time to prepare for meetings. (2) Regularly review the quality
of the board's decisions, advice and its actions. (3) Separate the positions of CEO and
Chairman to different persons to balance power and for independent decision making of
management. (4) The board should clearly delegate authority to management and regularly
reviews management's effectiveness. (5) All staff should receive a personal development
review at least annually.
5. The Board should know the role of the board and who does what in relation to governance
will create a good relationship between the board and management. The company should
then clarify the boards role in strategy. If the number of meetings cannot be doubled, then
the hours per meeting must be extended to at least three-four hours. The company must
monitor organizational performance to ensure legal compliance and to ensure that corporate
decision making is consistent with the strategy of the organization and with owners
expectations. To be able to attain this, the company must identify the organizations key
performance drivers and establish appropriate measures for determining success. The
company should also understand that it is the board of directors who employs the CEO. Their
relationship is crucial to effective corporate governance because it is the link between the
boards role in determining the organizations strategic direction and managements role in
achieving the companys objectives. There should be briefings, presentations and anything
that can provide director with additional information so that they be able to find answers to
the questions and then share it to the meeting. In every meeting, there would be meeting
agendas, board papers and boards committee structure. The chairperson and the CEO will be
appointed to different people so as to help achieve balance of power, increase accountability
and improve boards capacity in decision-making independent of management. The board will
regularly assess its own performance and that of individual directors. It is important for the
company to be aware of their own strengths and weaknesses so that they know where they
should improve.